The Best Time For Using Covered Calls

| October 26, 2015 | 0 Comments

The Best Time For Using Covered Calls

There probably isn’t an options-related topic as misunderstood – yet extremely popular – as trading covered calls.  Covered calls are widely used by retail and institutional traders alike.  However, I often feel the strategy is misrepresented, and sometimes poorly executed.

You see, a covered call strategy seems simple in theory (and it certainly can be).  But, it is a far more nuanced type of trading than many people understand.  If you really want to delve into it, covered call trading can be quite complex.

However, there are plenty of straightforward ways to implement covered calls, without getting too bogged down in the details.  The key is understanding when best to use this time-testing strategy… and when not to.

Okay, so when is the right time to use covered calls?

Let’s start by looking at an example.

Here’s the chart of $JPM:

JP Morgan Chase

JPM has had a fairly uneventful year overall, despite the market volatility which reached extremes in late summer.  The stock has returned about 2% so far this year.  The share price has also been sitting around the 50-day moving average for the most part, outside of the drop during the stock correction in August.

Unlike many other financials (and stocks in general), JPM didn’t get hit that hard during the correction – and bounced back quickly.  Prior to late August, the stock had slowly moved upward, in a very non-volatile manner.

Now that the market has stabilized, JPM once again looks like it could fall into a steady, neutral to bullish pattern.  That makes it a perfect covered call candidate.

So now what? 

It’s especially important to identify the right stock when making a covered call trade.  Picking the right stock at the right time can make a huge difference in the success of your strategy.

We just identified a great covered call candidate in JPM.  So what makes it so special?

First and foremost, covered calls work best in a neutral to bullish environment.  And, that’s exactly the way JPM has been trading for the last year.  It’s been up, but not skyrocketing higher by any means.  Plus, when the market corrected, it didn’t get hit nearly as hard as many other stocks.

Keep in mind, a covered call trade is selling a call against a long stock position.  The trade is maximized if the stock price is right at the short call strike upon expiration.  For a refresher on covered calls basics, follow the link.

Essentially, you want your stock to go higher, but not too high.  Moreover, you don’t want to see a big selloff.  A sideways market is great, but a slightly bullish trend is even better.  The thing is, we’re talking about the most common market condition!

That’s what makes covered calls so useful.  In the majority of instances, the trade will work.  And don’t forget, it’s not just the yield on the calls which adds cash to your portfolio (month after month).  The long stock position can really boost your profits as well.

JPM makes an excellent candidate for covered calls for other reasons as well.  Notably, it’s generally perceived as a strong company worth holding for the long-term.  It also has strong fundamentals.  That means there’s likely a floor to the downside.

What’s more, the company offers a dividend of nearly 3%.  Not only is it another reason the shares are likely to be held for the long-run, but it’s accretive to your total yield.  In other words, if you’re using a JPM covered call strategy, you’ll get your yield on the short calls plus the dividend yield each quarter!

Here’s the bottom line…

Covered calls can work in a variety of situations, but the best time to use them is when you have a healthy stock in good market conditions.  A company without much downside is a huge benefit.  And, if you can throw a dividend into the mix, it’s even better.

We’ll have much more on covered calls moving forward, so stay tuned!

Yours in Profit,

Gordon Lewis
Options Trading Research

Note:  Gordon Lewis has been trading options for more than 15 years and he now writes and edits for  You can sign up for the newsletter and get a free research report. We are your go-to source for top notch options trading research.

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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